While apparent aspiration to home ownership has not decreased noticeably, the number of private renters has increased steadily since 2007. Over this period the growth of tenant take-up was typically associated with young singles or childless couples, often in professional occupations.

The speed of that change increased dramatically since the credit crunch, as the difficulty in meeting mortgage criteria, most noticeably the increased cost of a deposit, has pushed the average age of the unassisted first time buyer to 37.

Increased demand for renting is likely to continue as loan-to-value ratios remain low, property prices remain high and low interest rates restrict households’ ability to accumulate savings. We forecast that private renting could account for one in five households by the end of 2016.

Widening demand

We also anticipate that the demand for rented accommodation will begin to spread across a much greater mix of neighbourhoods over the next decade.

Increasingly, those priced out of owner-occupation are likely to include older age groups, who are consequently more likely to have children and need family housing rather than small apartments.

There is also a separate cohort of private sector tenants who increasingly rent through choice, including those requiring labour mobility and flexibility or who expect their household status to change. Added to this are a group whose needs are not met by the social housing sector. The capacity of the social housing sector to provide intermediate housing has diminished due to subsidy withdrawal.

Recently this has coincided with reduced capacity among housebuilders to subsidise new social housing stock, given suppressed levels of house building. Already the private rented sector has taken up some of the slack, adopting a client base who are, at least partly, reliant on housing benefit.

Matching supply

Together this means that supply in the private sector needs to expand in terms of both quantity and variety.

It also presents a variety of investment opportunities which need to be matched to the investment criteria of different types of landlord whether they are private individual, institutional or corporate investors.

Some investor types will continue to be best suited to supplying short-term, AST rack-rented stock for young professionals, where returns are dominated by capital growth, whilst others will be more suited to long-term investment where income yield increasingly dominates.

Investment performance

We believe our analysis of where properties lie within a matrix that contrasts nature of location and the grade of existing housing stock, can help to assist potential purchasers in their decision-making and investment strategies (see Savills Investment Matrix in the gallery).

It also has a real relevance to other players, namely the developers supplying new stock into the rented sector and social housing providers looking to take advantage of the ability to charge rents at up to 80% of the market level on new stock.

Importantly the value of portfolios within this matrix will depend on the appetite of each investor and will differ between investors depending on their target performance and whether they will (literally) be valuing income stream or VP open-market growth potential.

Development potential

Finding a way to capture this value is particularly important for housebuilders developing large sites. Large sites will be impossible to develop in a truly sustainable manner if only a limited range of housing is built on them.

Providing a range of viable investment products has the ability to diversify the range of product, type of occupier and type of owner and reduce the reliance on a limited pool of owner-occupier purchasers. As a result it has the potential to significantly boost rates of sale by selling and forward-selling let stock and part-owned equity stakes.

To unlock that potential, investment products that readily appeal to investors need to be developed. Here something can be learned from the social housing sector. It has become imperative that Housing Associations attract private money in order to fund increased housing provision. Many have the covenant and track record to raise bond issues, for example, on the back of sizeable and stable rental income streams, and we expect to see the use of such instruments increase.

A new understanding

In order to understand the tenanted sector, we believe that it is necessary to make a clear distinction between the nature of occupants who are renting and the landlord type.

Much existing analysis of the ‘residential investment’ sector fails to differentiate between the different combinations of these categories. Sometimes this means that only direct investment by private individuals or ‘buy to let’ investors are considered while ignoring other types of either direct or indirect funding and investment. This is set to change.

Taken from
Focus: Development, Investment & New Homes, 2011